Peter Morici: Anti-growth policies again slow economy

Anti-growth policies continue to frustrate the aspirations of working Americans. The economy is likely growing at less than 2 percent in the second quarter, making prospects remote for a better job market.

Higher payroll taxes and income taxes paid by the wealthy took away $165 billion in purchasing power. Consumers reacted, but with a lag, because they need to keep driving to work and feeding their children – now car dealers and shopping malls report slowing sales.

Overall, the fiscal drag of about $165 billion in higher taxes and another $44 billion in federal outlays mandated by sequestration are subtracting a tidy sum from aggregate demand, but the focus on short-term budget policies fails to reckon with a tougher issue – before these, even with record government spending and rock-bottom interest rates, the economy has averaged only 2.1 percent growth since mid-2009. By contrast, the Reagan recession was just as deep and wrenching as the Obama recession, but the Gipper accomplished 5.3 percent growth over the comparable period.

Simply, what was broke and caused the financial crisis has not been fixed.

Banking is increasingly concentrated on Wall Street, with the top five or six firms controlling about half of all deposits nationally. Even as the Fed pumps record amounts of money into the economy, these megabanks have difficulty assessing local business projects. Small businesses that formerly relied on independent regional banks constantly complain that "banks will give us a loan when we don't need one."

Big banks are happy to lend to multinationals like General Motors but much less so to their suppliers, and they are hamstrung by litigation and adopting to excessively cumbersome Dodd-Frank financial regulations. They are not alone – manufacturers complain that federal and state regulators make building, running and hiring increasingly difficult. Either CEOs can spend their best talent building their businesses, or fencing with regulators and in court – the Obama administration has made that choice for them.

The Affordable Care Act ladles on mandates, taxes and higher health insurance premiums, leaving consumers with fewer dollars to spend, and making businesses of all sizes even more reluctant to hire.

The $500 billion trade deficit – mostly on oil and with China and Japan – drags on demand for U.S. goods and services about three times more than recent tax increases. Drilling bans and restrictions off the Atlantic, Pacific and Gulf Coasts and in Alaska, and the reluctance of the Obama administration to bring meaningful pressure on China and Japan to fairly value their currencies, make significant relief unlikely.

Now, the Energy Department is considering boosting exports of liquefied natural gas, when keeping the new bounty from shale deposits at home to boost manufacturing would increase GDP and employment much more.

The Federal Reserve – by buying massive amounts of Treasury and mortgage backed securities – has kept the big banks profitable and boosted the housing market. But rock-bottom interest rates allow banks to "earn" profits and pay big bonuses with virtually free money. This puts off the necessary and inevitable restructuring of U.S. banking – investment houses must be separated from commercial banks to reduce systemic risks, and large depositories have too many layers of bureaucracy that regional banks don't have. Those make loans scarcer, more expensive and cumbersome to obtain than they need to be.

The housing market continues to recover but new home construction is less than 3 percent of GDP and cannot power a recovery. Moreover, easy-money Fed policies are creating new bubbles in big city markets – rock-bottom interest rates are elevating prices above what incomes will sustain when the Fed takes its foot off the accelerator. Asset bubbles are appearing in other markets – stock, corporate debt and agricultural land.

In the near term, the Fed can keep the economy growing at a modest pace, but without better regulatory, health care, trade and energy policies, Americans face slow growth, higher taxes and stagnant or falling wages.

Peter Morici is an economist and professor at the University of Maryland's Smith School of Business.